USD/JPY currency pair moves higher

The yield differential between the dollar and the Yen has grown to the highest levels since April of 20, printing near 260 basis points. The expansion of this differential should drive the currency pair higher, as the correlation over the past few years has been above 90%. The differential makes up the forward curve in the two year space, which is a driving factor behind the direction of the USDJPY currency pair.

Hedge fund traders continue to move into short yen positions according to the latest release from the CFTC. According to the most recent commitment of traders report released for the week ending November 19, 2013, managed money added 15,000 short contracts in futures and options while also increasing long positions by approximately 1600 contracts. The large increase in short yen futures positions shows a strong change in sentiment.

Concern grows internally at the Bank of Japan over their inflation goal. Some members of the Bank of Japan’s board believe it will be difficult for the BOJ to achieve its 2% inflation goal within two years, as pledged in April. The minutes of the last meeting in October show that three out of nine policy makers voted against a statement which said that the bank expects inflation to hit 1.9% in 2015. The skepticism contrasts with the optimism of BOJ Governor Haruhiko Kuroda. The central bank will either alter their expectations formally or expand their asset purchase program to help them achieve their goal.

The USDJPY moved through downward trend line resistance last week and is testing the current 102 level. Short term support is seen near the 10-day moving average at 100.50. Momentum is higher with MACD (moving average convergence divergence) index is printing in positive territory with an upward sloping trajectory. The RSI is printing near 71, which is above the overbought trigger level of 70.

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